Tax & Accounting / Regulatory
Using a territorial tax system, Panama’s tax laws differ if the source of the income is generated within or without Panamanian territory.
Income produced from any source within the territory of the Republic of Panama is subject to tax, but levied only on net income derived from operations within the territory.
Foreign sourced income is 100% exempt from income tax. Essentially, a company based in Panama does not pay any income tax if it only performs international operations from Panama. More specifically, income from the following activities is not considered to be produced within the territory of the Republic of Panama:
- Conducting operations in another country from an office established in Panama.
- Directing transactions which are executed, completed, or effected outside Panama from an office established in Panama.
- Distributing dividends or participations, when these are derived from income not produced within the territory of the Republic of Panama, including the activities producing income in parts a) and b) above.
Corporation tax relevant to Panama-generated income is 25% of net taxable income.
Standard VAT is 7%, with 10% for hotel/accommodation and alcohol, 15% for tobacco.
The tax year in the Republic of Panama coincides with the calendar year, and books must be up to date within three months of the close of the fiscal year. Annual income tax declarations must be submitted on the same timetable. VAT declarations are to be submitted monthly, by the 15th of the following month.
Municipalities levy taxes at the local level, ranging from US$10 to US$2,000 per month.
Panama requires 36 tax payments per year, which will take an average of 400 hours to administer.
Accounts must comply with IFRS.
There are no audit requirements for Private Companies in Panama, though legal entities operating outside Panama are required to maintain accounting records and supporting information for five years. The Resident Agent is responsible to retain these in a confidential manner, only disclosing them when prompted by Panamanian authorities.
Labour / Payroll matters
The Panamanian Labour Code specifies a copy of each signed employment contract be filed with the Ministry of Labour.
Minimum wage is adjusted annually and is dependent on industry/sector. The 2022 monthly minimum rates range from US$326.55 to US$971.35. Workers are usually paid on the 15th and 30th of each month.
Day time workers:
- operate between 06:00 and 18:00,
- maximum of 8 hours per day / 48 hours per week (most work 44)
- overtime charged at hourly wage +25%
- active between 18:00 and 06:00
- maximum of 7 hours per day / 42 hours per week
- overtime charged at hourly wage +75%
An employee can work between day and night shift, but will be considered a night shift employee if working for more than three hours of the designated night shift.
There are 12 official public holidays in Panama, though offices usually close for Holy Week (Easter) and from 15 December to 12 January for Christmas. Working on a public holiday requires a 150% wage.
Employees are eligible for 30 working days of vacation following 11 continuous months of employment, or one day for every 11 days of work. Employees may split their vacation into a maximum of two periods.
Panamanian workers receive a 13th Month bonus payment equivalent to one month’s wage, paid over three instalments and due on 15 April, 15 August and 15 December.
Paid maternity leave operates for up to six weeks before the child is born and then eight weeks following birth. There is a minimum 14-week rest period.
Employers are required to pay social security contributions of 12.25% of the total remuneration of the employee, along with an education insurance tax (1.5% of salary). Workplace accident insurance premiums are also due from the employer, rates for which range from 0.98% to 5.67% depending on the risks associated with the role.
Terminating workers can be tricky and, in the case of non-voluntary termination for employees with two or more years of service, can require approval from the Ministry of Labour. There are 16 allowable ‘just causes’ for termination that can be grouped into three categories: situational, bad acts and economic conditions. Written notice of termination must specify the reasons for such and provide at least a 30-day notice period.
While foreign workers can only constitute a maximum of 10% of the workforce, there are many types of work visa available, including Qualified Investor, Friendly Country and Free Trade Zone Investor. The basic Employment visa is available to senior employees, technicians or executives and grants two years temporary residency, with the option of permanent residency and Nationality after five years.